STATE BUSINESS RELATIONS AND ECONOMIC PERFORMANCE - PowerPoint PPT Presentation

STATE BUSINESS RELATIONS AND ECONOMIC PERFORMANCE KUNAL SEN IDPM, UNIVERSITY OF MANCHESTER AND JOINT DIRECTOR, IMPROVING INSTITUTIONS FOR PRO-POOR GROWTH (IPPG) Many of the research findings presented in this lecture are available on: www.ippg.org.uk

Copyright Complaint Adult Content Flag as Inappropriate

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

An early view on the determinants of economic growth argued that economic growth occurs in contexts where the state respects the property rights of private producers and where it does not expropriate property or allows others to do so.

However, as has been witnessed in East Asia, economic growth has occurred in contexts where there were strong collaborative relations between the political and economic elites.

‘good growth-enhancing relations between business and government elites are possible’ (Maxfield and Schneider 1997)

Effective SBRs can help prevent both government failures and market failures.

HOW DO THEY PREVENT MARKET FAILURE?

They help solve information related market and co-ordination failures (e.g, business associations monitoring their members and ensuring compliance).

They solve collective action problems.

Peak and sectoral business associations that are active, independent of the state and representative of the private sector in the region, can resolve many of the collective action problems that are inherent in developing countries.

Effective SBRs lead to credible commitment on the part of the government to certain policies can minimise uncertainties on future policy actions in the minds of investors.

Creates an institutional environment where the state provides high quality public goods that matter to the private sector such as infrastructure, effective public administration and secure property rights.

Check and balance function on government tax and expenditures, and policies.

The Northian view of ‘good’ institutions was focused on well defined and secure private property rights. Influenced WDR 2002 and the De Soto agenda. Shaped most of the empirical work that followed (AJR, Rodrik et. al., Hall and Jones…)

The Williamsonian emphasis was on transactions costs – WB interpreted this narrowly in their Doing Business surveys to mean any regulatory/legal and extra-legal impediments to the investment activities of firms.

Dynamic panel data regressions of the determinants of economic growth in Africa show that effective SBRs have strong positive effect on economic growth in SSA (significant at 1 per cent level in most regressions).

This effect remains robust to the inclusion of other measures of institutional quality, and other controls (open-ness, govt consumption, inflation).

While economic growth in India has been strong since the mid 1980s, not all regions in India have benefited equally from the improvement in overall economic performance.

India’s federal structure and the significant political autonomy and independence in legislative powers enjoyed by state governments, along with regional variations in the collective strength of the economic and political elite, has led to strong variations in SBRs across states in India.

Labour regulation – Labour laws in India are mostly state-specific, and different states have enacted changes in labour laws, which are either pro-workers/anti-business or pro-employer (Tim Besley and Robin Burgess have coded these changes in laws).

Stamp duty as a measure of the attitude of the state governments towards business establishments and their expansion.

Demographic factors such as rural and urban population and the female-male ratio; literacy rate and per capita expenditures on education and health, real cost of power supply and state-specific average rainfall per year

In some specifications we include state-specific time trends in addition to year and state effects to capture state-specific long term trends of SBRs and growth.

We exploit the fact that SBRs are the outcome of a political process, with different groupings in state legislatures (the Vidhan Sabha) having different propensity to engage with businesses.

We use data from records of the number of seats won by different national parties at each of the state elections under four broad groupings in line with the classification by Besley and Burgess (2000). The parties are (i) Congress Party, (ii) a hard left grouping (iii) a soft left grouping.

Other things being equal, if Bihar (one of the worst performing states in India) had the same average (fitted) value of the SBR index over 1985-2006 as Gujarat, its annual rate of growth would have been 2.5 percentage point higher over the same period.

This is a substantial increase over Bihar’s actual average rate of growth of 1.4%. Similarly its growth rate would have increased by 12% relative to its growth trend over the same period.

The results suggest that the key dimensions of SBRs that stimulate economic growth seem to be those related to the actual operations of the interactions between states and businesses.

Confirms the arguments made by Atul Kohli, Rodrik and Subramanian and Bradford De Long on the role of the ‘attitudinal shift’ of the state in explaining India’s growth acceleration at the national level. Our findings suggest a similar story at the sub-national level.

On the other hand the formal organisations (both public and private) in place to favour such interactions seem to be even counterproductive for economic growth.

They trace it to a fractured dominant coalition ambivalent about reforms; an industrial work-force still shaped by attitudes of the past towards work and wage bargaining; and a party machinary embedded in the promotion of clientelism.